Knowledge Center: Publication
Prioritizing HR to Succeed in China6/30/2016 Jonathan H. Zhu
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While the human-resources (HR) function is almost universally acknowledged as a critical source of business value, the situation on the ground in many privately owned enterprises (POEs) in China suggests that many companies haven’t gotten the message. Some examples include the following:
- At a Chinese life-sciences company with global ambitions, the head of HR is a close relative of the founder. The appointment reflects the importance that the owner attaches to HR, and it is consistent with the traditional cultural practice of putting someone you trust in charge of highly critical functions. Unfortunately, the owner’s relative has no prior experience in managing the HR function.
- Similarly, a Chinese medical-device company hired a head of HR whom the owner met through his personal network. Although the owner trusts him, the HR head is not a specialist in the healthcare industry and is relatively inexperienced. As the company expands globally through acquisitions in overseas markets, the organization is now realizing that it does not have enough of the right people or the HR infrastructure required to integrate and manage the newly acquired entities.
- At a large POE conglomerate, the base compensation for the top management team is about half that at comparable multinationals (MNCs) operating in the country. Although the company is doing well (earning several billion dollars in revenue), shortcomings in its HR infrastructure, performance-management system, and processes for identifying high-potential executives are making it difficult for the company to attract people from MNCs—and retain the ones it has managed to recruit.
Even at companies where the leader is aware of the importance of attracting, developing, and retaining talent, disconnects can occur with HR. At most POEs, the HR department has often been short of resources and not given enough authority. For example, at one POE an HR leader who had been hired away from an MNC competitor was astonished to find how little in the way of HR infrastructure and resources the company was willing to allocate to the function—contrary to what he had been promised during the interview process. Not surprisingly, many top HR leaders (and other executives) who come from MNCs struggle when they are confronted with a POE’s organization. The kind of infrastructure they are accustomed to is absent, and though the owner expects them to build it, they must constantly justify every expenditure. In such situations an HR leader’s past credentials and achievements are often discounted. There is significantly more pressure for these leaders to prove themselves than there would be in a comparable MNC role.
In short, many POEs do not take the HR function seriously. Why not? In part because these companies are young and have grown extremely quickly, they may not have had the time (or in some cases, the capacity) to implement the necessary organizational structures and strategies. Moreover, in many firms HR is regarded as a primarily administrative function responsible for processing and distributing paychecks, enrolling employees in benefit plans, and taking care of other routine transactional matters. But the biggest obstacle to unlocking the full business potential of the HR function lies in the deeply ingrained attitudes and beliefs of top leaders (many of whom are the owners)—in mind-sets that prevent a full appreciation of HR’s value and, worse, can justify inaction.
Undervaluing the HR function can have unfortunate, but predictable results. If executives are not aware of gaps in their organization’s capabilities, they may fail to establish a culture and reputation conducive to attracting the brightest talent. This can ultimately affect their later expansion and success.
The undervaluing of HR continues at a time when POEs have become an important source of economic growth and of increasing employment in China, as well as major contributors to the country’s growing role as a global trader. Indeed, POEs are beginning to gain some significant advantages in their now decade-long battle for talent with multinational companies—primarily because the compensation gap between POEs and MNCs is narrowing. According to CEB (formerly the Corporate Executive Board), in 2007 only 9% of highly skilled Chinese professionals preferred to work for a domestic company, while 41% preferred to work for a Western MNC. By 2010, the gap had narrowed considerably, with 28% preferring domestic companies and 44% preferring MNCs.1 In the ensuing years that momentum has continued. Increasingly, these much-in-demand professionals are seeing fewer reasons to work for an MNC, with its distant headquarters, when they could be working at the center of a domestic company in the second-largest economy in the world. Clearly, MNCs have their work cut out for them (see sidebar, “For MNCs, HR looms larger than ever”).
But unless POEs dramatically overhaul their HR functions, they will be unable to utilize, motivate, and retain these talented individuals. They will have difficulty converting their newfound attractiveness as employers into significant business advantage. And they will unnecessarily hobble their efforts to compete on the global stage.
Learning from leaders
One place POEs can look for inspiration is the country’s high-tech industry, where a handful of pioneering companies paved the way a decade or more ago. In 2006 Heidrick & Struggles, in conjunction with the Stanford Project on Regions of Innovation and Entrepreneurship (SPRIE), conducted an in-depth study of what leaders of high-tech companies in China were actually doing to address talent challenges.2 Because Chinese tech companies are where many world-class practices are first developed, we found numerous examples of POEs that recognized the value that HR provides and whose practices are still relevant:
- Neusoft, from its beginnings, pursued a strategy of hiring students and investing intensively in their capabilities, and today it is the largest China-based company providing IT solutions and services. In addition, the company conducted in-depth leadership assessments of its top 500 employees and established development plans to guide their professional growth.
- At Lenovo, to counteract the tradition of a strong hierarchy in Chinese organizations that often produces followers instead of leaders, the company’s mid-level managers were given carefully set performance targets, but how they met them was left entirely up to their own judgment.
- At travel-services website Ctrip, senior executives were the instructors for crucial courses such as sales, quality, and marketing (which the CEO taught). For employees in new roles, completing required courses was necessary for career advancement.
These are just a few of the concrete, practical steps that these companies took on their journey to becoming household names. The first step? Acknowledge the attitudes that are holding back your HR function—and your company—and work consciously to overcome them.
Changing HR means changing your mind-set
In our experience, the chief obstacle standing in the way of HR excellence in many POEs is the mind-set of their leaders. Their unexamined attitudes prevent them from seeing the importance of HR, and, as a result, they do little to capture its full value. Yet once these attitudes are recognized, there are some simple steps for reversing their destructive effects. Here are five such steps for overcoming what, in our experience, are the most frequently encountered attitudes and beliefs that are preventing many POEs from realizing the full business value of HR.
Acknowledge the “founder trap” and take steps to avoid it
In many cases, company founders—flush with confidence from their initial success—believe that they can “do it all.” They resist sweeping organizational changes or new faces at the leadership table, even as their company grows rapidly. Yet experience has clearly shown that as a company grows from a start-up to a mature enterprise, it needs distinctive kinds of leadership at each stage. Company founders can either invest the time and effort in becoming skilled in the type of leadership required at each stage or surround themselves with people who compensate for their shortcomings. This includes transformational HR leaders, who can not only provide the high-level HR competence founders lack but also help founders develop required leadership skills as needed.3
Get the fundamentals right
Though HR is seen as largely transactional in many POEs, a general complacency about the function often leaves even these essential aspects underdeveloped. Many companies lack a basic HR infrastructure—people processes, enabling technology, and an effective means of communication with employees. Companies that fail to address these shortcomings quickly will continue to fall further behind the competition. Most important, they will be unable to move beyond the purely transactional to the transformational—the practices that turn talent into a company’s most potent competitive weapon.
Getting the fundamentals right requires some work, including organizational assessment and development. But HR best practices are widely known and understood, and POEs can benchmark themselves against exemplary companies and put those practices in place.
Adopt a strategic, transformational view of HR
In our experience, the one thing that characterizes top-performing companies around the world is that they use HR to support strategy and help catapult their companies past competitors—both local and global. Once the fundamentals have been put on a sound footing, leaders can turn to the value-adding, transformational aspects of HR: systematic talent and leadership development, identification of high potentials, retention of top performers, carefully designed incentives to drive performance, an engaging culture, and thoughtful succession planning.
All of these activities must be governed by a talent strategy that supports that of the company overall. That means projecting talent needs into the future based on the company’s strategy and managing existing talent toward that future. For example, many companies—POEs and MNCs alike—see innovation as a key part of their business strategy. Whether through the development of innovative products and services, a new business model, or creative internal processes, the objective is to gain more than merely incremental advantages over the competition. Such major advances occur only through talent—the people who individually and collectively generate superior ideas, fresh perspectives, and new ways of doing things.
Many companies simply hire smart people and hope for the best. They fail to see that the connection between talent and innovation can be systematically addressed as an organizational issue. But forward-looking HR leaders understand the key role that their function can play in enabling a strategy of innovation. Among other things, they can understand the leadership implications of an innovation-focused strategy, transform the executive team backing an innovation, and identify the elements of the corporate culture that need changing to support innovative thinking, appropriate risk taking, and new behaviors.
Treat HR as an investment, not a cost center
The phenomenal growth rate of China’s economy over the past 35 years, along with the growth of many companies and of personal wealth, has led to a short-term, bottom-line mind-set. That mind-set values the tangible—the immediate returns and the trappings of success, which have come so effortlessly for so long. As a result, the intangibles, such as leadership and talent development, get less attention and little investment. HR is seen as a cost center, rather than as the means for taking the company to the top and keeping it there over the long term. This is particularly important against a backdrop of economic contraction, when companies’ people processes and systems will be under both greater scrutiny and greater strain. While the urge to cut might be strong in such times, the winners will ultimately be companies that have invested in transformational HR.
Use organizational structure to drive performance, not to monitor employees
All of the familiar organizational structures—functional, divisional, and matrixed, among others—offer advantages and disadvantages for a business. And they answer the question, “Who decides what and when?” Unfortunately, we have found that in many POEs, the reporting relationships and management of various activities tend to concentrate decision making at the very top and are designed to make sure that managers and employees are doing things exactly as instructed. Part of this is cultural—stemming from an unwillingness on the part of employees to question authority and a penchant on the part of leaders for designing organizations along family or clan lines. And part of it is inexperience with organizational design and development intended to prepare executives for broader roles and greater responsibilities and to impart greater agility to the business. But deployed well and managed actively over time, an organizational structure with a transformational HR leader—one with a high degree of integrity and empathy, as well as strong HR skills—can empower employees and produce a deep bench of highly competent leaders.
This, in turn, leads to more engaged and innovative employees and, ultimately, stronger business performance.
These steps—escaping the founder trap, creating sound fundamentals, taking a transformational view of HR, investing for the long term, and using organizational structure to improve performance—can help propel even the most neglected HR operation toward the excellence that separates the leaders from the laggards. As POEs adopt such steps and begin to achieve excellence in HR, MNCs will have a tougher time competing against them. And POEs will find that success begets success: earning reputations that attract exceptional talent will, in turn, attract even more talent, enabling these farseeing companies to outdistance their more shortsighted competitors.
For MNCs, HR looms larger than ever
Just because many Chinese POEs are struggling with HR is no reason for MNCs to rest on their laurels. Indeed, MNCs in China often struggle with HR too, and we find that the quality of HR talent can vary widely from company to company.
The stakes are only getting higher. Not only are MNCs facing slower economic growth and tougher competition from POEs, many report increasing government support for national companies, mounting government intervention against MNCs, and a growing number of more sophisticated consumers who are no longer dazzled by global brands. Together, these and other trends are eroding the long-standing advantages of MNCs in China—advantages that compensated for whatever setbacks they experienced in the long-running battle for local Chinese talent.
And the battle for talent is where the larger war for market supremacy in China will be won or lost. Indeed, many talented individuals in China are now questioning whether Western-based MNCs remain the employer of choice. Chinese companies are increasingly offering competitive compensation packages, attractive career paths, and the opportunity to work at the center of the company, not the periphery as in an MNC. In addition, many more Chinese are opting to join POEs for their agility and culture of rapid decision making. Some also perceive a “glass ceiling” in MNCs, where top positions often go to expats.
These shifts in attitude, coupled with the erosion of MNC market advantages, have given POEs a golden opportunity. If they can get HR right, their enhanced ability to attract, develop, and retain top local talent may, in the current climate, prove to be the decisive advantage in their competition with MNCs. That is a big “if,” of course, but it is now a distinct possibility.
To forestall that possibility, MNCs must make sure that their HR functions are second to none. That will require some hard work, for despite being a part of companies that typically have exemplary HR operations in their home countries, the China subsidiaries (as noted earlier) lag far behind in the function. In MNCs, as in POEs, the function is still evolving. And in MNCs, the quality of the HR function may vary widely among the regions in which they operate and where organizational development is rudimentary and talent is scarce.
What can MNCs do? Any improvement starts, of course, with hiring the right HR leader (Figure 1).
In addition, MNCs should work to:
- Identify the organization’s talent and capability gaps.
- Develop a robust succession program and strong talent pipelines.
- Create a culture and value system that puts a premium on talent.
- Get strong buy-in from internal stakeholders, especially business-line leaders.
- Develop strong external partnerships that link recruiting to employer branding.
- Provide rotational programs for high-potential employees to broaden their leadership skills and vision.
- Conduct frequent market-benchmarking surveys to ensure competitive levels of compensation for all positions, and share the results globally across the organization.
- Continuously train leaders in management skills, including tolerance and compassion.
Creating these conditions and strengthening the organization will be challenging, as it will require not only outstanding HR talent but also business leaders who understand and support the function’s mission. Talent in general is scarce in China. Now that competitive advantage hinges more than ever on the HR function, this talent, too, will be in more demand than ever.
Moreover, these challenges come at a time of fundamental change for many MNCs, as they shift from being low-cost manufacturing hubs for the world to becoming higher-value manufacturers and R&D centers that, in many cases, are attempting expansion in China's domestic market. These new business models may require fresh leadership models as well, placing new demands on HR and taking the battle for talent to a higher level of sophistication.
If MNCs are to beat the odds, they will have to work both inside and outside their organizations simultaneously. Inside, they must rapidly develop their promising HR talent. Outside, they should map and track external HR talent, and benchmark their internal people against it. When it is necessary to attract external HR talent, MNCs can do so by offering potential hires the opportunity to build a comprehensive, strategic HR function—an opportunity that will improve retention. If MNCs, like POEs, are to win the battle for talent, they will have to first secure the best candidates for the HR function.
About the author
Jonathan Zhu (firstname.lastname@example.org) is a partner in Heidrick & Struggles’ Shanghai office and a member of the Healthcare and Life Sciences Practice.
2 See Getting Results in China: How China’s Tech Executives Are Molding a New Generation of Leaders, Heidrick & Struggles, in partnership with the Stanford Project on Regions of Innovation and Entrepreneurship, 2006.